Dollar jumps versus euro and yen on yields, Fed stance

NEW YORK Wed Mar 14, 2012 4:37pm EDT

A picture illustration shows a 100 Dollar banknote laying on one Dollar banknotes, taken in Warsaw, January 13, 2011. REUTERS/Kacper Pempel

A picture illustration shows a 100 Dollar banknote laying on one Dollar banknotes, taken in Warsaw, January 13, 2011.

Credit: Reuters/Kacper Pempel

NEW YORK (Reuters) - The dollar leaped to an 11-month high against the yen and a one-month peak versus the euro on Wednesday a day after the Federal Reserve upgraded its economic outlook amid a stream of U.S. data signaling a sustainable recovery.

Rising Treasury yields drove dollar/yen strength, with the greenback notching its strongest two-day performance in four months. The two-year Treasury note yield hit its highest since July 29, making the dollar more attractive as a buy-and-hold asset instead of as a currency to fund investments in higher-yielding assets elsewhere.

The dollar rose as high as 83.83 yen, its highest since mid-April last year. Traders said Japanese exporters were reluctant to sell the dollar and anticipated further strength. The dollar has advanced nearly 9 percent against the yen in 2012 to date, and analysts are raising their forecasts.

The dollar is on path for a sixth straight weekly gain against the yen, with its trajectory linked to last month's monetary easing steps by the Bank of Japan and Japan's record trading deficit.

While the Bank of Japan this week did not follow up last month's surprise policy easing, the market sees the door to further growth-supportive moves by the Bank of Japan as being wide open, according to Omer Esiner, chief market analyst at Commonwealth Foreign Exchange in Washington.

"The widening spread of U.S. yields over their Japanese counterparts remains a key driver of the dollar's strength."

The dollar was last at 83.74 yen, up 1 percent on the day and following a 0.8 percent gain on Tuesday, its best two-day performance since early November after intervention by the BoJ.

"We have revised our dollar/yen forecast up to 90 in six months and think it will stay there until 12 months from now," said Raghav Subbarao, currency strategist at Barclays Capital in London.

Barclays' previous forecasts were for dollar/yen to be at 82 yen in six months and 84 yen in a year.

The improving outlook for the U.S. economy, driving expectations that the Fed will be less likely to launch another round of bond-buying, is in marked contrast to the euro zone and Japan, where struggling economies make further easing by the European Central Bank and more Bank of Japan action more likely.

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Graphic on Fed Economic, rate projections:

link.reuters.com/zud36s

Interactive - Fed officials: hawks vs doves:

link.reuters.com/ryv97p

Graphic - 10-year benchmark yields for US, UK, Germany

link.reuters.com/buc27s

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EURO SLIPS

While the rally in USD/JPY is about rising yields, the fall in EUR/USD is as much about the rally in U.S. bank stocks and rate expectations, according to Adam Cole, global head of FX strategy at RBC Capital Markets in London.

The euro fell to a one-month low of $1.3008 after triggering stop-loss orders below support at $1.3054, around the 50 percent retracement of a January 16-February 24 rally. It was last at $1.3024, down 0.4 percent for the day.

Further support for the euro loomed at the next major trough on daily charts at the February 16 low of $1.2973.

The Fed's policy-setting Federal Open Market Committee on Tuesday slightly upgraded its economic outlook. {ID:nL2E8ECBGD]

Further boosting dollar sentiment was the Fed's announcement on Tuesday that most of the largest U.S. banks passed its stress tests, a key measure of the health of the country's banks, bolstering strong gains on most stock exchanges.

"We suspect that EUR/USD could continue to follow closely the tightening German-U.S. bond yield spread," said Valentin Marinov, currency strategist at CitiFX, a division of Citigroup, in London. "Deep and protracted recession in the euro zone seems likely to keep the ECB in an accommodative mode for now."

"At the same time, the nascent recovery in the U.S. seems to have muted to a degree the Fed's urge to accommodate further."

The euro zone common currency strengthened against the Swiss franc, however, rising to a peak of 1.2146 francs, its highest since January 10, ahead of a Swiss National Bank rate decision on Thursday.

Although economists polled by Reuters expect the SNB to stick to its euro/Swiss floor at 1.20 francs and keep interest rates at zero, there have been calls for the bank to raise the floor. The euro was last up 0.4 percent at 1.2124 francs.

(Additional reporting by Nick Olivari; Editing by James Dalgleish)